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Friday, January 23, 2009

Unit trust still a good investment for the long term

KUALA LUMPUR: The past 12 months has seen the erosion of wealth in virtually every type of non-fixed income investment, and unit trust funds have not been spared.Despite offering a modicum of security compared to traditional equities owing to its large pool of investors and its diverse portfolio of investments, trust funds have nonetheless declined alongside market indices, albeit at a slower rate.According to data from the Securities Commission, the total net asset value (NAV) in Malaysia dropped by more than 20% to RM135.87 billion in November from RM170.1 billion in January.There is, however, an anomaly within the figure, namely the decline in the NAV of Islamic-based funds. Unlike conventional funds’ NAV, which plunged 22% to RM119.77 billion in November from RM153.7 billion in January, Islamic funds declined only 2% to RM16.11 billion from RM16.4 billion.A fund manager noted that this could be due to the fact that Islamic funds were not traded intensively and tended to lag behind the movement of conventional funds.

Case in point is the fact that the total NAV of Islamic funds only peaked in June with an NAV of RM17.98 billion, up 10% from January before starting its downwards slide. By that time, conventional funds’ NAV had already started to shed value since its peak in January.

On the whole, September’s figure also marked the first time that the total NAV failed to show positive year-on-year growth in at least four years. Subsequently, total NAV for September shrank 4% compared to the same month in 2007.

According to Eric Wong, Hong Kong head of research for global fund analyst Thomson Reuters Lipper, the last 12 months has seen unprecedented movements in the fund industry for both Malaysia and the region.

“The year-to-date (January to November) average loss of all funds registered for sale in Malaysia is the largest (-23.10%) since its average loss for the entire year in 1997(-43.30%),” Wong said in an email reply to The Edge Financial Daily.

He added that a similar trend had been occurring in other major regional markets such as Thailand, Hong Kong, Taiwan, Singapore and China.

The silver lining for Malaysian investors, however, is that the Malaysian fund industry has incurred significantly smaller losses then that of most other Asian countries. This finding is not surprising as the Kuala Lumpur Stock Exchange has outperformed other countries in the region.

Wong believed there were other considerations as well.

“This may probably be attributed to the capital control imposed by the Malaysian government, rendering foreign investors less interested to invest in Malaysian equities and bonds,” Wong said. “Their relative low participation reduces the volatility of Malaysian equities and bonds.

“This, coupled with the majority of funds that are registered for sale in Malaysia, are invested in Malaysian equities and bonds, limits the average loss of Malaysian funds in comparison to those in other Asian countries.”

Responding to reports that a majority of equity funds in Malaysia had increased their portfolio allocation to cash or other liquid securities in Malaysia as a precaution against a continued slump in the market, Wong said some funds made the switch to cash in the third quarter.

However, there was no evidence that a majority of equity funds were doing so, he added.

Time to buy and what to buy?
With equities trading at historic lows, common wisdom suggests that now would be a good time to cherry pick for good stocks at cheap prices. By extension, this would mean that equity funds also would trade cheaply.

Nonetheless, Wong believed it was premature to conclude that equities were undervalued, saying it was likely that equities would continue their slide in 2009.

“The values of equities are basically determined by two components: interest rate and earnings growth. Low interest rates and expectation that central banks around the globe will continue to lower interest rates will continue to support equities,” he said.

“However, with reports showing the global economic environment is projected to deteriorate further in 2009, the downwards trend of corporate earnings growth is less likely to reverse in the coming quarters.

“Such a scenario means equities will still face significant downside risk on their valuation in 2009 and, hence, investors should not at this stage park their capital in equity funds.”

Wong added that the same was likely true for commodity funds, which were traditionally even more volatile than equity funds.

For investors who are concerned about preserving the value of their investments, Wong advised continued investment in bond-linked and money market funds, although yields had fallen to very low levels recently.

So long as investing for the long-term is concerned, investors shouldn’t concern themselves too much with the current state of the market, as markets will grow in the long term.

Unit trust funds, he added, were not “opportunistic investments” that would yield massive returns in the short-term. As a managed basket of investments, funds offer the benefit of professional management in exchange for more normalised returns on investments.

“When we talk to clients, we tell them that they have to look at it from a period of time of five years and above,” Foo said. “Our objective is to help our clients achieve their investment targets and this means rebalancing their portfolios depending on the condition of the market.”

Meanwhile, markets will rise and fall in the long-term, he said. What investors have to do is to rebalance their portfolios during both the peaks and the troughs. In that respect, it is essential for investors to establish investment goals that correspond with their tolerance for risk.

Foo said a disciplined approach would allow for greater returns in the long-term. His clients, he said, averaged between 7%-8% in returns although they had differing investment targets.

“When the market was way up, we also rebalanced our clients’ portfolios. We said, ‘Look, 60% return is absurd for a fund, so we need to rebalance,’ and we rebalanced our clients down,” he said.

As for asset classes of funds, Foo said the type of fund was not as important as the revenue model of the underlying investment and consistency in performance, although he said MyFP’s policy was to stay away from “theme-based funds” such as those localised in a specific region or commodity.

Foo also advised that investors refrain from going on a purchasing spree based on the “cheapness” of a stock or fund, as pricing was not a good indicator of the value of the share.

“At the end of the day, it’s not the price that determines the value of the stock — that kind of analysis is too simplistic. You have to look at the intrinsic value of the underlying equity to determine that,” Foo said.

ii) Monthly or regular investment

iii) Withdrawal from EPF (KWSP) - account 1

Maximum: (n/a)

Withdrawal/Redemption: at any time (5 days notice)

Who can invest?

i) Individuals or corporations

ii) Residents or non-residents of Malaysia

CWA is a top unit trusts marketing company, a marketing arm to CIMB Principal Asset Management which is a subsidiary of CIMB Group...the second most valuable listed company in Malaysia (market capitalization of more than RM80 billion).

For further info please contact your professional Islamic investment and financial consultant based in Kuala Lumpur or fill up the info request form below.

FOREIGN INVESTORS CAN ACCESS TO UNIT TRUSTS IN MALAYSIA

"There are no restrictions for foreign investors to access Islamic securities, bonds and unit trusts in Malaysia. Non-residents are free to invest in Malaysia in any of these products. There are also no restrictions on the repatriation of capital, profits and income earned from Malaysia."[Securities Commission Malaysia]